The Chinese Defense Economy Takes Off - Sector-By-Sector Assessments and the Role of Military End-Users - Dragon Report
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The Chinese Defense Economy Takes Off
Sector-By-Sector Assessments
and the Role of Military End-Users
2013 Research Briefs
Edited by TAI MING CHEUNGThe Chinese Defense Economy Takes Off
Sector-by-Sector Assessments and the Role of Military End Users
edited by Tai Ming Cheung
UC INSTITUTE ON GLOBAL CONFLICT AND COOPERATIONAbout the cover photo: J15 fighter aircraft on the deck of the Liaoning aircraft
carrier in November 2012. Courtesy of 81.navy.com.
The University of California Institute on Global Conflict and Cooperation
University of California, San Diego
9500 Gilman Drive
La, Jolla, California, 92093-0518
http://igcc.ucsd.edu
© 2013 The Regents of the University of California.
All rights reserved.
ISBN: 978-0-9847085-2-9 (paper)
978-0-9847085-3-6 (e-book)CONTENTS
Introduction.......................................................................................................................... v
Section 1: Charting the Chinese Defense Economy............................................... 1
THIS SECTION AVAIABLE ONLY IN THE PRINT EDITION.
CONTACT HEIDI SEROCHI, HSEROCHI@UCSD.EDU TO ORDER.
Section 2: 2012 Overview............................................................................................... 15
The State of the Chinese Defense Industry....................................................................... 17
Tai Ming CHEUNG
The State of China’s Defense Research and Development: Great Expectations.............. 21
Kathleen WALSH
A Framework for Measuring Innovation in the Weapons Acquisition Architecture......... 24
Maggie MARCUM
Section 3: Sector Assessments......................................................................................... 29
The China Aerospace Science and Technology Corporation and the Concept . ................31
of Integrated Innovation: A Case Study
Kevin POLLPETER
Innovation in China’s Defense Aviation Industry...............................................................37
Michael RASKA and Alanna KROLIKOWSKI
iiiChina Has Become a Top Global Warship Builder . ........................................................ 40
Gabe COLLINS
China’s Defense Electronics and Information Technology Industry................................ 45
LeighAnn RAGLAND, Joe McREYNOLDS, and Debra GEARY
China’s Ordnance Industry: More Butter than Guns........................................................ 49
Arthur DING and Daniel ALDERMAN
China’s Nuclear Industry After Fukushima...................................................................... 53
Jingdong YUAN
China’s Civil-Military Integration.................................................................................... 57
Brian LAFFERTY, Aaron SHRABERG, and Morgan CLEMENS
Military-Technical Cooperation Between Russia and China: Current State ................... 63
and Prospects
Vasily KASHIN
Section 4: The Role of End Users................................................................................... 69
The People’s Liberation Army Air Force and the............................................................. 71
Chinese Aviation Industry
Phillip C. SAUNDERS and Joshua WISEMAN
China’s Navy Embraces Technology: Western Science, Chinese Culture?...................... 75
Bernard COLE
China’s Evolving Defense Economy: A PLA Ground Force Perspective ....................... 78
Cortez A. COOPER III
The PLA’s Second Artillery Force as a Customer of China’s Defense Industry.............. 83
Michael S. CHASE
Suggested Further Reading ............................................................................................ 89
List of Acronyms.............................................................................................................. 90
ivIntroduction
Tai Ming Cheung
2012 was a banner year for the Chinese defense dustry is still troubled by its central planning leg-
economy as it produced a series of headline-grab- acy of entrenched monopolistic practices, bureau-
bing technological accomplishments. Highlights cratic fragmentation, and compartmentalization.
ranged from the commencement of aircraft carrier Kathleen Walsh argues that the current status of
operations that included deck landings of fighter the defense R&D system is mixed as it undergoes
aircraft to manned space dockings. In a welcome problematic reforms to fix persistent institutional
departure from the country’s obsessive secrecy in deficiencies, but that it is enjoying substantial gov-
military affairs, many of these developments were ernment support for funding as well as access to
publicized officially or unofficially. Taken togeth- domestic and foreign investment. Her conclusion
er, these advancements are a powerful statement is that China may well become an increasingly
of intent and confidence by China’s techno-na- attractive place for foreign defense firms and the
tionalist-minded leadership of the country’s long- international scientific community, which could
awaited coming of age as a world-class defense lead to even more significant progress in China’s
and strategic technological power. defense R&D evolution.
This collection of fifteen policy briefs explores Maggie Marcum offers a very useful frame-
how China has made such impressive military work to identify innovation in the Chinese de-
technological progress over the past few years, fense RDA system. She sketches out the key
what is in store, and what are the international se- characteristics of a generic RDA process frame-
curity implications. The briefs are summaries of a work, which applies not only to China but also
series of longer research papers presented at the to other developed and developing regimes, and
third annual Chinese defense economy confer- offers indicators linking common RDA elements
ence held by the Study of Innovation and Tech- and innovative factors that are important in weap-
nology in China in July 2012. The conference ons development. The framework provides a road
brought together many of the world’s leading ana- map to incorporate a broad basket of elements that
lysts of the Chinese defense economy, including have an important impact on the RDA process,
representation from China, Russia, and Taiwan. such as financial, human capital, and regulatory
The research papers will be published by IGCC in dynamics, which are usually not considered in
a conference volume in Spring 2013. examining how countries carry out their weapons
The briefs in Section Two provide an over- development programs.
view of the present state of the defense economy, Section Three provides a detailed sector-by-
the performance of the defense research and de- sector survey of the present state of the defense
velopment (R&D) apparatus, and the forging of a economy with particular emphasis on industrial
framework to analyze the defense research, devel- and economic performance, current and long-
opment, and acquisition (RDA) system. Tai Ming term development plans, and measuring innova-
Cheung points out that the Chinese defense econ- tion activities. The six sectors that were examined
omy is enjoying the best period of performance in covered the military aviation, space, shipbuild-
its history with stellar profits and an impressive ing, electronics and information technology (IT),
array of outputs; however, much of the defense in- ordnance, and nuclear industries. In addition, two
vbriefs address the current situation in Chinese- sector is shifting from the manufacturing of prod-
Russian defense technology ties and ongoing ef- ucts largely derived from foreign technologies and
forts to promote civil-military integration. know-how to cultivating its own design and R&D
Not surprisingly, the assessments showed capabilities. This emphasis on a homegrown de-
a wide degree of variance. Gabe Collins offers fense electronics and IT base is heavily dependent
the most upbeat assessment in his survey of the on the civilian commercial and academic commu-
Chinese naval shipbuilding sector, arguing that nities that are closely linked to the global electron-
the country’s shipbuilders are likely to be able to ics and IT sectors. Civilian-military integration
indigenously build all the capabilities needed for (CMI) initiatives are a key driver of progress and
blue-water operations within the next five years. innovation in this industry.
Moreover, China has already overtaken Western The ordnance and nuclear industries have
Europe, Korea, and Japan in the range and vol- been left behind in the defense economy’s trans-
ume of ships under construction, and could reach formation, especially as their central focus is on
the technical levels of Russia by the end of this civilian commercial priorities rather than serving
decade and approach the United States by 2030. defense needs. In their brief on the Chinese ord-
Kevin Pollpeter, Michael Raska, and Alanna nance industry, Arthur Ding and Daniel Alderman
Krolikowski put forward more guarded but still point out that at least 90 percent of the annual
positive assessments in their reviews of the Chi- revenues of the two monopoly corporate players,
nese space and military aviation sectors. Pollpeter China North and South Industries Group Corpora-
undertakes a case study of China Aerospace Sci- tions, come from their civilian operations. These
ence and Technology Corp. (CASC) to show that two behemoths are primarily engaged in incre-
innovation in the Chinese space industry is mak- mental innovation and the adaptation of foreign
ing notable progress, especially in the pursuit of products, but there are early signs that they may
a sophisticated integrated approach to innovation now also be on the path of boosting their indig-
through organizational reforms that more closely enous innovation capabilities, especially as their
link R&D with modern business practices and financial strength is improving. In the aftermath of
heavy investment in human capital development. the 2011 Fukushima nuclear disaster in Japan, the
If CASC is disciplined in adhering to the princi- Chinese nuclear industry has focused its attention
ples of this new strategy, Pollpeter believes that the on improving safety and regulatory oversight, al-
Chinese space industry may have a good chance though ambitious plans to significantly expand the
of reaching its goal of building an advanced space domestic nuclear grid remain intact, according to
sector that is beginning to reach world standards Jingdong Yuan. Another impact of Fukushima is
by 2015. However, China still has a very long that China may seek to upgrade the technological
way to catch up with the United States in terms standards of its future nuclear power plants from
of technological quality and efficiency. Raska and the current Gen-II Plus reactors that are the main-
Krolikowski point out that the Chinese military stay of the industry to safer and more advanced
aviation sector has made steady progress over the third-generation reactors such as the Westing-
past decade in narrowing the once-yawning tech- house AP1000, although this would mean more
nological gap with the world’s front-runners. The reliance on foreign sources rather than supporting
recent unveiling of the J-20 and J-31 fighters sug- indigenous technological development of the Chi-
gests an acceleration in this modernization drive, nese nuclear sector.
but they caution that deep-seated systemic prob- Vasily Kashin provides a fascinating account
lems, ongoing structural consolidation, and areas of the latest developments in military-technical
of weak technological sophistication should not cooperation between Russia and China, which has
be under-estimated. had a profound impact in China’s defense techno-
In their examination of the Chinese defense logical improvement over the past two decades.
electronics and IT industry, LeighAnn Ragland, Kashin notes that the relationship is currently
Joe McReynolds, and Debra Geary argue that this enjoying a revival after a period of turbulent de-
vicline dating from the early 2000s. But this rela- insights into the direction, priorities, and effort of
tionship is marked by a fundamental lack of trust, the Chinese defense establishment over the com-
and Russia is extremely wary of selling its latest ing years. One indicator as to the importance that
generation of advanced equipment and technolo- the Chinese defense authorities themselves are
gies, such as new generation aircraft engines and paying to these connections was the creation of
surface to air missiles, to China. the PLA Strategic Planning Department in 2011
In their assessment of CMI activities, Brian to address serious deficiencies and coordination
Lafferty, Aaron Shraberg, and Morgan Clemens gaps in their long-term force planning.
point out that while the government, the military, Policy briefs by Cortez Cooper (ground forc-
and the defense industry attach high priority to es), Bernard Cole (navy), Michael Chase (Sec-
this task, significant structural and behavioral im- ond Artillery), and Philip Saunders and Joshua
pediments stand in the way. The institutions and Wiseman (air force) tease out the dynamics in the
mechanisms to guide CMI are still poorly devel- often-conflicted and dysfunctional relations be-
oped and the key difficulties appear to be proce- tween end users and producers. All of the briefs
dural in nature. One of the key initiatives in the note that there is little information at present
CMI arena in the past couple of years has been the that sheds much insight into this issue, but there
promulgation of an overarching blueprint for CMI does seem to be a gradual development of insti-
development known as Document No.37, which tutional linkages between the defense economy
identified a number of bottlenecks that need to be and the PLA service arms, primarily centered on
tackled, such as improving coordination between the PLA General Armament Department and its
governmental, corporate, and research communi- service counterparts since the end of the 1990s.
ties. Lafferty et al. conclude that the jury is still These briefs and the research papers behind them
out as to whether CMI has reached the stage of represent pioneering work in a dimly-lit corner of
applying much influence on China’s defense S&T Chinese defense and security studies. Much more
transformation. needs to done to better chart these interactions.
Section Four addresses the perspectives and This compendium also contains fifteen charts
roles of the end users within the People’s Libera- and diagrams that provide up-to-date and relevant
tion Army (PLA) and their linkages and dynam- information into key aspects of the Chinese de-
ics with the defense economy. The relationship fense economy and the broader national science
between the producers and the consumers (both and technology enterprise.
the acquisition agencies and war-fighters) is little This compendium would not have been possi-
understood or studied, but is of crucial importance ble without the talented work of Lynne Bush (edit-
in the long-term examination of the evolution of ing), Heidi Serochi (project management), Joseph
Chinese military power. Understanding the nature Miller (charts), Hanlu Lu (research), and Elaine
of the interaction between strategic doctrine, op- Fleming (graphics).
erational strategy, technology, and economic and
industrial resources will provide vital clues and La Jolla, December 2012
viiSECTION 1 Charting the Chinese Defense Economy
Section 1 is included in the print version of "The Defense Economy Takes Off: Sector-By-Sector Assessments and the Role of Military End-Users." Contact Heidi Serochi at hserochi@ucsd.edu to order.
SECTION 2 2012 Overview
Research Brief 2013-1
January 2013
The Chinese Defense Economy
in the Early 2010s
Tai Ming CHEUNG
Summary
C hina’s defense economy is enjoying the best period of
performance in its history with stellar profits and the output
of an impressive array of military and high-technology products.
Revenues from the ten leading state-owned defense corporations have
increased by around 20 percent annually since the mid-2000s, which
is a remarkable turnaround for an industry that was bleeding huge
losses before the early 2000s. But while the defense economy has taken
important strides in transforming itself into a technology champion
over the past decade, much of it remains mired in the straitjacket of
its socialist central planning past. Entrenched monopolistic practices,
bureaucratic fragmentation, and compartmentalization are some of
the ailments that inflict the defense industry. If the Chinese defense
industry is to meet its goal of catching up to the global technology
frontier by the early 2020s, it will need to make bolder reforms
to replace its Maoist legacy and become a market-oriented, rules-
based system. The signs for now, however, are that the leadership
prefers a more cautious, consensus-based approach, especially
as the defense economy has been performing so well recently.
The Study of Innovation and Technology in China (SITC) is a project of the University of
California Institute on Global Conflict and Cooperation. SITC Research Briefs provide analysis
and recommendations based on the work of project participants. Author’s views are their own.
17Introduction The economic performance of the defense
industry has been even stronger. Average annual
China’s defense economy is enjoying the most revenues from the ten leading state-owned de-
productive and profitable run in its history fuelled fense corporations since the mid-2000s have ex-
by generous state funding, pent-up domestic de- panded by around 20 percent. Total reported rev-
mand, and access to critical foreign technologies enues from these firms came to an estimated RMB
and know-how. The military aviation industry is 1.477 trillion (US $233 billion) in 2011. (See chart
leading the way with the development of more on page 8.)
advanced fighter aircraft programs than any other Approximately one-third of defense budget
country in the world. They include fifth-genera- goes to covering equipment expenses, according
tion (called fourth-generation by the Chinese) J-20 to Chinese official explanations. This includes
and J-31 fighter aircraft and the J-15 carrier-borne research and development (R&D), experimenta-
fighter, which is derived from Russian/Ukrainian tion, procurement, and maintenance activities.
technologies. The shipbuilding, space and missile, This would mean that the 2012 equipment budget
and defense electronics sectors have also scored would be in the region of RMB 220 billion.
major technological successes. Financial data from defense corporations sug-
Senior leaders in charge of the Chinese de- gest, however, that the scale of the PLA’s acqui-
fense economy met at the end of 2011 to review sitions maybe significantly larger than these dis-
progress in the revamp of the country’s military closed figures. It is likely that around one-quarter
technological capabilities. With a proliferation of the income of the ten defense corporations,
of new weapons coming out of research facili- or RMB 370 billion (US $58 billion), would be
ties and factories, the All-Army Armament Work defense-related business and the rest would be ci-
Conference declared that “new historical achieve- vilian output. Even accounting for modest levels
ments” have been reached in the “strengthening of foreign arms exports, which is estimated to be
of the People’s Liberation Army (PLA) deterrent US$1–1.4 billion annually, these figures suggest
and combat capabilities.” The meeting also set out that Chinese military research, development, and
priorities for the Twelfth Five-Year Defense Plan acquisition (RDA) spending is at least 50 percent
(2011–2015), with calls to accelerate the pace of higher than the official figures would imply.
modernization and close the still-wide technologi- While the PLA is by far the defense industry’s
cal gap with the global frontier. largest customer, there are other important domes-
At the same time, fundamental structural, tic clients. The State Administration for Science,
operational, and governance problems stand in Technology, and Industry for National Defense
the way. They range from entrenched corporate (SASTIND) is another major source of funding
monopolies to the absence of a rules-based ac- for the defense industry. As the central govern-
quisition system. Along with slowing economic ment’s defense industrial regulatory agency, SAS-
growth, these difficulties could threaten to derail TIND provides substantial funds for R&D as well
the defense economy’s long-term catch-up efforts. as for industrial support.
By The Numbers: The The Economic Performance
Financial Health of the of the Defense Corporations
Defense Economy The country’s ten state-owned defense corpora-
Double-digit growth in annual defense outlays for tions are the principal engines powering the Chi-
the past 20 years is a principal source of the dy- nese defense economy’s transformation. An im-
namism of the defense economy. Officially pub- portant indicator of improving efficiency is the
lished figures show average annual defense bud- profitability of the defense corporations, which
get increases of 11.8 percent between 2000 and have recorded strong growth over the past de-
2011 in inflation-adjusted terms. This growth rate cade. Total industry earnings reached an estimated
was maintained in 2012 with an 11.2 percent hike RMB 80 billion in 2011 or an increase of RMB 10
to RMB 670 billion (US $106 billion). billion over the previous year. This is a remark-
18able turnaround for an industry that was a chronic In second place was the shipbuilding industry,
money loser before the early 2000s. with the combined R&D of its two major corpora-
There is no breakdown to show how much tions reaching RMB 12.4 billion ($1.96 billion) in
of the profit flows from civilian versus military 2010, which is equivalent to 5 percent of its rev-
sales, but contractors have long complained that enues. The ordnance sector was third, with both
they struggle to make any profits on their defense of its corporations spending RMB 11.1 billion
operations because of regulations dating from the ($1.75 billion) on R&D, which was 1.85 percent
central planning era that limit profit margins on of total revenues. According to information from
military contracts to a fixed 5 percent on top of another survey of China’s largest 500 enterprises,
actual costs. There is little incentive for contrac- R&D expenditures for Aviation Industry of China
tors to invest heavily in new industrial capabilities Corporation (AVIC) in 2009 were RMB 16.8 bil-
because of these low rates of return. lion ($2.65 billion), which was equivalent to 6.7
Of the six sectors that constitute the Chinese percent of revenue.
defense industrial base, the largest in terms of rev- China National Nuclear Corporation’s R&D
enue and workforce size is the ordnance industry. spending in 2009 was RMB 322 million, although
The two dominant companies in this sector, China this jumped to RMB 1.87 billion in 2010. Al-
Ordnance Equipment Group (COEG) and China though data is lacking for the defense electronics
Ordnance Industry Group (more widely known sector, it is likely its R&D spending as a percent-
as Norinco), accounted for 40 percent of total de- age of annual revenues would be comparable to
fense industry revenue for 2011. The overwhelm- the levels of the aviation or shipbuilding indus-
ing share of this output is in commercial, non- tries, which would offer an estimate of RMB 3.5
defense goods. Norinco reported that 90 percent billion. Total estimated R&D corporate spending
of its revenues in 2011 were from civilian-related by the defense industry in 2010 would likely be
activities, and the figure is likely to be even higher around RMB 66–68 billion ($10.4–10.7 billion).
for COEG, which is largely engaged in civilian The military authorities have set a target for
commerce (see Policy Brief 8). all defense corporations to spend at least 3 percent
The aviation and shipbuilding industries are of their annual revenues on R&D by 2020. Be-
the next largest defense industrial sectors, with sides the R&D spending by corporations, the PLA
revenue in 2011 of more than RMB 250 billion and SASTIND also have sizeable R&D budgets,
($39.4 billion) each. They are followed by the although the actual amounts are not published.
space and missile (RMB 210 billion), nuclear In addition, defense-related R&D funding can be
(RMB 100 billion), and defense electronics and found in other parts of the state budget, including
information technology sectors (RMB 70 billion) funding for science and technology development
respectively. programs such as the 863 and 973 Programs.
For R&D and innovation-related activities,
the sectoral line-up is different. A 2010 survey
of the innovation capabilities of major Chinese
Obstacles to Future
state-owned corporations showed that the space Progress
and missile industry spent the highest amount on While the Chinese defense industry has taken im-
R&D of all the defense sectors by a large mar- portant strides in transforming itself from a third-
gin. R&D expenditures of the two key space and rate military technological and industrial laggard
missiles companies, China Aerospace Science and is now beginning to knock on the door of
and Technology Corporation (CASTC) and China the global top-tier elite, it still faces tough chal-
Aerospace Industry Corporation (CASIC), totaled lenges that could impede continued progress. The
RMB 21.5 billion ($3.4 billion) in 2010, or around fundamental problem is that large portions of the
10 percent of their revenues. CASTC accounted defense industry continue to operate according
for nearly two-thirds of this expenditure and was to the norms, operating principles, routines, and
the third largest R&D spender among all of the habits of the socialist central planning economy.
country’s state-owned corporations. This is not surprising, as the defense industry did
19not seriously begin to undertake market-oriented are in the hands of different units, and under-
reforms until the late 1990s. institutionalization has meant that linkages among
One major problem is the lack of competi- these entities tend to be ad hoc, with major gaps in
tive mechanisms for awarding contracts for major oversight, reporting, and information sharing. The
weapons systems and defense equipment because fragmented nature of the RDA process may have
of the monopolistic structure of the defense in- been a major factor in why Hu Jintao was appar-
dustry. Contracts continue to be awarded through ently caught by surprise by the first publicized test
single sourcing mechanisms to the big ten state- flight of the J-20 fighter aircraft that took place
owned defense corporations. Competitive bidding while U.S. Defense Secretary Robert Gates was in
and tendering only takes place for non-combat Beijing in January 2011.
support equipment, such as logistics supplies. If the Chinese defense industry is to meet its
An effort at the end of the 1990s to inject more goal of catching up to the global technology fron-
competition by splitting each company that was in tier by the 2020s, it will need to make a success-
charge of a defense sub-sector into two did little ful transition to become a market-oriented, rules-
to curb monopolistic practices. Some PLA acqui- based system. For this to happen, the defense
sition experts view this monopoly structure as the industry will need to make a decisive break from
biggest single obstacle in its long-term reform. its central planning legacy. This will require re-
Bureaucratic fragmentation is another serious placing the incremental, consensus-based process
problem and affects a number of critical coordina- that is driving the reform agenda with a far bolder
tion and command mechanisms within the PLA approach to aggressively tackle the root causes
and RDA systems. One gap at the top of the mili- of the defense industry’s underlying weaknesses.
tary RDA management pyramid is the truncated The defense leadership appears satisfied for the
role of the PLA General Armament Department time being to continue to take a gradualist ap-
(GAD), which is only responsible for managing proach to reform and modernization, although in
the armament needs of the ground forces, People’s select high-priority areas such as space and mis-
Armed Police, and militia. The navy, air force, and siles there is a willingness to pursue more inten-
Second Artillery have their own armament bu- sive and bolder development strategies.
reaucracies, and competition is fierce for budget
resources to support projects favored by each of Tai Ming CHEUNG is the director of the University
these services. This compartmentalized structure of California Institute on Global Conflict and Coop-
serves to intensify parochial interests and under- eration, and the leader of its project on the Study of
mines efforts to promote joint undertakings. Innovation and Technology in China (SITC). He is
also an associate professor in residence at the School
The RDA process is also plagued by compart-
of International Relations and Pacific Studies (IR/PS)
mentalization. Responsibilities for R&D, test- at UC San Diego, where he teaches courses on Asian
ing, procurement, production, and maintenance security and Chinese security and technology.
20Research Brief 2013-2
January 2013
The State of China’s Defense Research
and Development: Great Expectations
Kathleen A. WALSH
Summary
T he current status of China’s defense research and development
(R&D) capabilities is mixed. The defense R&D sector is undergoing
significant structural and institutional change while benefitting from
continued, substantial government support for funding, infrastructure,
and cross-innovation community development efforts, all taking place
in an age of increasing globalization. This brief outlines key internal
and external factors likely to impact China’s progress in pursuit of its
defense R&D ambitions as well as considerations for U.S. policymakers.
The Study of Innovation and Technology in China (SITC) is a project of the University of
California Institute on Global Conflict and Cooperation. SITC Research Briefs provide analysis
and recommendations based on the work of project participants. Author’s views are their own.
21Beijing views the present period through dustry with ongoing Party reform efforts; and
2020 as a window of opportunity for maximizing • Degree of success or failure (real and
China’s leverage of the still-globalizing economy perceived) in delivering reliable,
for the purpose of developing a dual-use, modern advanced defense capabilities to the
defense industrial development system to serve Chinese military and export markets.
China’s ambitious military modernization goals.
For China’s defense sector, it is the best of times External Factors
in terms of government support; it also could be
Numerous external factors also could impact Chi-
the worst of times from their perspective because
na’s defense R&D status. External factors worth
of enforced reforms and, more so, if these efforts
keeping in mind include the following:
do not achieve their intended results by the leader-
ship’s 2020 deadline. Clearly, the pressure is on to • The current and long-term state of the
reform and substantially improve China’s defense global economy (whether globalization
R&D performance by then. continues apace as Beijing expects);
The current status of China’s defense R&D • The direction and scope of
capabilities is mixed. China’s defense R&D sec- China’s brain drain/gain;
tor is undergoing significant structural and insti- • The level of international conflict
tutional change. Several key internal and external and competition affecting demand
factors are important in determining how effective for globally sourced defense items
these changes might be. (including, increasingly, from China);
• Demonstration of Chinese combat
Internal Factors capabilities (or lack thereof) in a
In addition to the leadership transition already un- regional or international conflict; and
derway and its inevitable influence over the pace • The degree of external threat perceived
and direction of future defense R&D priorities, by leaders in Beijing and elsewhere,
there are several other key internal factors af- as well as responses to same.
fecting China’s defense R&D status and outlook.
These include, but are not limited to: Assessment
• Level of support and continued fund- An assessment of China’s current defense R&D
ing from government and other sources; sector reveals several important considerations
• Level of autonomy (from all levels of gov- for U.S. defense policymakers.
ernment authority) in decision-making; China’s defense R&D development strategy
• Degree of openness to, and inter- rests on connections that can be made across a
connectedness with, other key actors in and diverse array of actors, institutions, and innova-
across the scientific and R&D community tion systems—both foreign and domestic, civil
as well as throughout China’s innovation- and defense-related—and the technology trans-
oriented clusters, zones, and regions; fers, spillovers, and innovative ideas and practic-
es they convey. An increasingly important part of
• Demographic trends (urbanization, this effort is the attraction of overseas educational
migration, population, education skill partner institutions, some of whom see China as a
sets, and transition to younger versus “gold mine” for educational expansion opportuni-
older researchers, among others); ties. Chinese professionals in highly specialized,
• Level of corruption and other particularly scientific, fields are also being incen-
market and systemic disruptions (includ- tivized to return.
ing secrecy of the defense sector); Spending on basic research and development
• Party-Army-business relations, potential con- programs with potential defense implications can
flicts of interest, and the level of compliance be expected to continue to rise along with in-
(or resistance to same) by China’s defense in- creased military spending.
22In terms of both military spending and fund- It is unclear at present whether ongoing de-
ing of scientific endeavors, China is becoming a fense R&D sector reforms are focused simply on
more attractive marketplace for domestic and in- fixing persistent institutional problems common
ternational businesses, scientists, and researchers, in the past or focused also (or more so) on im-
who are knocking on Beijing’s increasingly open proving processes due to the types of challenges
door in greater numbers to take up residence and that success can bring. The likelihood is that it is
exploit the expanding sources of support. This is a mix of both. But it is important to not presume
particularly so as funding for these activities has that continued reforms indicate failures per se, as
become more scarce in the West since the 2008 has often been the case in the past. It is important
financial crisis. Notwithstanding the many com- instead to determine whether ongoing reforms
plexities—indeed, difficulties and uncertainties— indicate progress among China’s leadership and/
inherent in conducting such activities in China, or a growing openness to change—or even to ac-
the growing opportunities available, along with cepting failure—in the pursuit of more effective
well-funded, government-sponsored incentives and efficient innovative processes, institutions,
(at the central, provincial, and local government and personnel (for instance, if pursuing but failing
levels) designed to promote foreign investment, to achieve high-risk, yet high-reward scientific re-
faculty appointments, and scientific research in search). Analysts are advised to at least be alert
China, could play a potentially important role in to this possibility despite the long-established pat-
expanding China’s own defense R&D community tern in China of institutional and systemic reforms
and related capabilities, as it is intended to do. following periods of defense industry and R&D
China’s defense conglomerates increasingly failings, particularly given the PLA’s recent rev-
are being shaped in the mold of Western defense elations of various advanced military platforms
contractors: as large-sized, mainly defense-sector- such as subs, fighter jets, and missile and space
oriented enterprises that are also engaged in ris- technologies.
ing levels of international business (commercial
and defense) across the globe, whose particular Conclusion
competitive advantages include close and long-
standing contractual relationships with govern- If China comes to be viewed (as it was and re-
ment and military clients, and as particularly ca- mains in the commercial sphere) as an essential
pable complex systems integrators (or, at least, are market in which international scientific experts
advertised as such). Yet this vision of developing and defense firms feel they cannot not be en-
a modern defense industry similar to that found gaged in an increasingly globalized environment,
in the West (along the lines of Lockheed Martin, this could tip the scales toward anticipating more
Boeing, Northrup Grumman, EADS/Airbus, and progress in China’s ability to realize its defense
others) is a far cry yet from being realized. R&D ambitions than toward the otherwise more
China’s opening of parts of its defense indus- likely scenario of modest, incremental progress
trial sector to domestic and foreign investment, amid continued reform efforts.
if modest at this stage, presents the potential for
a similar dynamic to that which took hold in the
commercial sector where enterprises could in time Kathleen WALSH is associate professor of national
security affairs at the U.S. Naval War College and an
(in this case, global defense industrial enterprises) affiliate of NWC’s China Maritime Studies Institute.
come to view the China market as one in which
they “cannot not” be invested. This dynamic could The author appreciates research assistance from CDR
take hold if China’s defense sector is viewed by Robb Bennett for the paper on which this research
defense firms as a strategic and competitive in- brief is based. None of the views contained herein
vestment, particularly in the context of declining reflect his views or those of the U.S. Department of
Western military budgets and China’s expected Defense, U.S. Navy, or Naval War College, but are en-
increased spending on military modernization. tirely those of the author.
23Research Brief 2013-3
January 2013
Developing a Framework to Identify
Innovation in the Defense Research,
Development, and Acquisition Processes
Maggie MARCUM
Summary
T his brief offers an analytic methodology to characterize innovation
factors in defense research, development, and acquisition
(RDA) processes that shape a country’s ability to design and produce
technologies and weapon systems. The RDA framework provides a
systematic, interdisciplinary approach to analysis by benchmarking past
experiences to gain insight into future defense industrial capabilities.
What sets countries with developing defense RDA capabilities
apart from those with “developed RDA systems” is the ability to
indigenously design complete systems without foreign assistance.
Such independent capabilities exist in a select handful of states.
The Study of Innovation and Technology in China (SITC) is a project of the University of
California Institute on Global Conflict and Cooperation. SITC Research Briefs provide analysis
and recommendations based on the work of project participants. Author’s views are their own.
24What Are Defense tures. This may lead to new organizations to meet
RDA Processes? national defense goals.
In basic terms, defense RDA processes are the
activities taken by developers to transform inter- The Innovation in RDA
nal and external resources into weapons systems. Processes Framework
Some elements of the defense RDA processes The goal of this study is to generate an analytic
are influenced by historical precedence, cultural guide to benchmark design and production ca-
traits, and national economic and defense plan- pabilities and to consider how past trends have
ning systems. formed foundations for the next level of innova-
Underpinning the RDA process are certain tive capability.
necessary technical skills to enable design, de- This new framework will allow analysts to
velopment, and production of a weapons system. take a systematic approach to evaluating change
Portraying how successful a country’s RDA sys- over a period of time by identifying the overlap-
tem is at meeting its requirements requires incor- ping observable phenomena of hard and soft inno-
porating the typology of hard and soft innovation vation capabilities found in the stages of a generic
capabilities for research and development (R&D) RDA process.
of technology, components, and systems. Table 1 depicts the linkage between common
RDA elements and innovative factors (in italics)
associated with weapons development.
The Generic RDA The analysis of defense S&T capabilities be-
Processes Framework gins with a study of the evolution of RDA pro-
A review of several defense RDA systems indi- cesses and technical capabilities of a single weap-
cates that the basic bureaucratic defense acquisi- ons system over a defined period of time. The first
tion structure tends to be similar across country step is to come up with a list of RDA elements and
lines, although not all “developing” countries will hard and soft innovation factors that might signal
follow a Western model. a change in development processes.
Any analysis using a generic defense RDA Following classification of observable indica-
model or innovation framework must incorporate tors for each RDA development stage, the next
a check for mirror imaging (i.e. avoid assuming step would be to develop a series of related ques-
that other countries think and operate the same as tions to guide research on domestic technical ca-
their Western counterparts) of those practices and pabilities. This practice should help to eliminate
identify how a country is creating an environment bias in research by transforming generalizations
for innovation. For example, national priorities, into specifics.
coupled with technical and organizational capac- Table 2 represents a typical framework for
ity, may determine the acquisition process a coun- analysis of RDA elements, innovation factors, and
try selects to meet its defense needs. defining questions that could be used to direct re-
Decision-makers may choose any number of search for each generation of the selected system.
acquisition strategies, including indigenous devel- A series of case studies for each generation
opment, copying, co-development, licensing, pur- of the selected weapons system can help the
chase, or a hybrid mix of approaches based on a analyst to characterize defense industrial devel-
country’s national science and technology (S&T) opment practices in the context of the innovation
capability. As R&D practices evolve, so too will typology. From these cumulative case studies,
the RDA structure. For example, new political patterns of innovative change should begin to
and military leaders may wield more influence emerge. The final product—a synthesis of tech-
over R&D, including the push/pull of technology, nology and system case studies—will provide
funding for innovations, or the coordination of re- greater insight into a country’s potential future
search between the civil and military infrastruc- military capability.
25Table 1. Linkages Between Common RDA Elements and Innovative Factors
Pre-program Requirements/ Research and design Development and Production/ Operations and
activities Needs demonstration manufacturing maintenance
Basic/Basic The identification The government accepts A program manager A manufacturing System is presented
applied research of equipment a design concept. A sets a development, plan is executed. All to the service for
needs based on feasibility study is industrial production production-related acceptance. Failures
Development
capability gaps and conducted. Plans are made schedule with milestones. activities are defined to meet performance
facilities
strategic priorities. to develop or acquire Designs are finalized, and monitored. requirements may
Defense funding Concepts are technology and insert demonstrated, and Equipment is tested result in rejection and
of civil-related developed and into the program. Final approved for production. for final production modification. Systems
technology research submitted for specifications are accepted Contracts are selected and acceptance. are delivered for
Organizations consideration. by the government. and a systems integration operational use. At the
Manufacturing facilities
creating a Political plan is set in place. end of the spectrum,
Research laboratories and locations
“DARPA effect” and military equipment is maintained
and institutes Human capital— Approval processes
Entrepreneurial organizations and eventually disposed
Development facilities level of expertise
skills to market Technical skills of according to the
Budgets for Production facilities
technology advances investment in Design organizations Oversight and life-cycle plan.
Leading design Contributing enterprises approval for fielding
Degree of foreign defense programs Services involvement
personalities Technical know-how
26
involvement Perceived threats Culture for presenting in acceptance and
Defense funding of civil- Systems integration skills finished products retirement of systems
Recent events
related technology research Funding sources Interaction between Skill set for
that trigger a
military response Organizations creating Approval processes organizations maintenance
a “DARPA effect” and organizations Role of political and Degree of foreign
Contract
mechanisms Regulations Demonstration military leadership involvement
Import/export Degree of foreign
approval involvement
mechanisms
Organizations
approving
program start-up
Degree of foreign
involvementTable 2. Pre-Program Activities
RDA elements Hard and soft Defining questions
innovation factors
Funding Funding sources How is basic research funded? How is basic applied
research funded in support of defense innovation?
What is the degree of private industry R&D?
Organizations Corporate organizations Which organizations are involved in the transition
involved in R&D of activities to articulation of a formal program
requirement? Are there advanced R&D facilities
with experienced scientists and engineers?
Joint Interaction between What is the degree of collaboration in developing requirements?
organizations commercial and What entrepreneurial incentives exist for basic research?
defense organizations
R&D Risk What is the willingness to take risks to devel-
op break-through technologies? What is the edu-
cation level of scientists and engineers?
Technology Technology What is the degree of foreign technology reliance?
development breakthroughs or What are the indicators that a program will integrate
plans technology reliance external technologies or components?
Recognizing Innovation in China. The findings of this preliminary case study
the Defense RDA Framework: indicate that China has incrementally improved its
China’s Fighter Industry ability to conceptualize and build increasing com-
plex systems.
An initial examination of China’s development
strategy for its fighter industry suggests a trend
from import to imitation to innovation. An ex- General Conclusions
panded study of the generational changes of fight- This proposed analytic framework provides a
er programs will require additional interdisciplin- foundation to move from theoretical generaliza-
ary collaboration. The preliminary assessment of tions about R&D and systems development to a
China’s fighter industry demonstrates how a coun- more institutionalized analytic process that chal-
try with a limited industrial capability articulated lenges assumptions, assesses changes, and consid-
requirements and took a variety of pathways to ers future development strategies. Applying this
acquire and build its domestic capability. framework requires collaboration between experts
For example, domestic research in the ear- in various disciplines and the convergence of dif-
ly stages of imitation began with China seek- ferent theories and techniques to identify emerg-
ing opportunities with foreign suppliers of kits ing innovation. The Innovation in RDA Processes
or licensed-production agreements to develop a Framework is a tool to transform generalizations
foundation for its defense manufacturing prac- about capabilities into more concrete and specific
tices. Oversight and collaboration with a foreign assessments. As analysts consider all the available
partner is paramount at this early stage to build an information and begin to synthesize data, they can
emerging industrial capability. Use of this frame- make adjustments to previous conclusions.
work will help analysts to understand the pattern This framework provides a road map to in-
of R&D in major defense industrial programs in corporate elements such as human and financial
27resources, government and private investment
Maggie MARCUM is recognized as a subject mat-
strategies, venture capital movement overseas, ter expert on defense industrial programs in support of
the relationship between manufacturing and R&D research, development, and acquisition strategies for
organizations, and relationships between research weapons development—specializing in China. After
scientists and engineers that are not often consid- retiring from the intelligence community, she founded
ered in traditional defense industrial analysis. The iDETnet (International Defense Emerging Technology
application of the defense RDA model, coupled Network), an international collaborative forum whose
with the innovation typology, may bring to light mission is to promote and provide independent analy-
the occurrence of factors and events for which sis of disruptive and emerging technologies with de-
there is no apparent relationship to a weapons pro- fense and security-related implications.
gram but nonetheless affect its development.
28SECTION 3 Sector Assessments
Research Brief 2013-4
January 2013
The China Aerospace Science and
Technology Corporation and the Concept
of Integrated Innovation: A Case Study
Kevin POLLPETER
Summary
T he China Aerospace Science and Technology Corporation (CASC)
has embarked on a new, more comprehensive approach to innovation
involving a commitment to research, developing an organizational
structure that integrates research and development, adopting modern
business techniques, and investing in workforce development. This
comprehensive approach, dubbed integrated innovation (集成创新),
is described by CASC as the “core idea” of its system engineering
efforts. This policy brief examines CASC’s integrated innovation efforts
in regards to long-term planning, research and development, talent
development, and business strategy. It then assesses CASC’s performance
during the Eleventh Five-Year Plan and compares its performance to
that of the U.S. aerospace industry. Although CASC still lags behind
the U.S. space industry, its commitment to knowledge retention and
its relatively young workforce could help sustain its progress.
The Study of Innovation and Technology in China (SITC) is a project of the University of
California Institute on Global Conflict and Cooperation. SITC Research Briefs provide analysis
and recommendations based on the work of project participants. Author’s views are their own.
31Integrated Innovation and of commercial launches. As a result, while much
Its Application to CASC focus has been placed on the role of technology
transfer in accelerating China’s defense indus-
The China Aerospace Science and Technology trial innovation, the role of institutional change
Corporation (CASC), China’s leading space in- may be a better indicator of the ability of China’s
dustrial enterprise, has embarked on a new, more space industry to become internationally competi-
comprehensive approach to innovation involving tive over the long term. Indeed, the adoption of
a commitment to research, developing an orga- integrated innovation and its focus on excelling
nizational structure that integrates research and across a broad array of performance factors sug-
development (R&D), adopting modern business gests that CASC’s performance can be sustained.
techniques, and investing in workforce develop- Consequently, China’s space program will likely
ment. This comprehensive approach, called inte- continue to improve and may become an increas-
grated innovation (集成创新), is a Chinese con- ingly competitive global player in the internation-
cept that draws heavily on the work of Harvard al space market. Nevertheless, even though CASC
Business School professor Marco Iansiti and his has made great strides in manufacturing increas-
work, Technology Integration: Making Critical ingly capable space technology, it still lags behind
Choices in a Dynamic World. According to Iansiti, its U.S. competitors in terms of technology levels,
innovation relies on many factors that affect a cor- efficiency, and financial performance, indicating
poration’s ability to effectively bring a technology that the U.S. space industry will remain dominant
to the marketplace. The demands of integrating for years to come.
multiple technologies into a product that can meet
market demands has become increasingly compli-
cated due to the rising sophistication of technol- Long-Term Planning
ogy, the science used to create it, and the rapidity China’s space industry, like every other industry
with which new technologies are brought to mar- in China, is governed by a series of plans intend-
ket. To operate in this increasingly complex world, ed to build the country into an innovation nation.
Iansiti concludes that companies must be able to China’s space industry was designated as one of
excel across a broad range of capabilities. This in- China’s strategic emerging industries under the
cludes an emphasis on research, an organizational Twelfth Five-Year Plan, and human space flight,
system that facilitates the integration of research lunar exploration, and earth observation were pri-
and development, an emphasis on training and re- oritized under the 2006 Medium- and Long-Term
taining employees, and strategies to both develop Plan for Science and Technology Development.
technologies and bring them to market. This prioritization sets goals, presumably in-
CASC describes integrated innovation as the creases funding, and provides a set of benchmarks
“core idea” of its system engineering efforts. As on which China’s space industry leaders will be
such, CASC’s leadership has combined long- judged, motivating the industry to meet its goals.
range technology planning, an R&D organization- This top-down approach has often been criticized
al structure integrating basic and applied research for stifling innovation at lower levels, where
with systems integration, human resource devel- breakthroughs most often originate. Such an ap-
opment, and a business strategy emphasizing both proach may have utility when applied to the space
civilian and defense technologies and domestic industry, however, which is primarily dependent
and international markets, into an overall strategy on government markets for funding.
designed to transform CASC into a world-class
aerospace corporation. The adherence of CASC
to the concept of integrated innovation has re- The Research and
sulted in significant advances in China’s space Development System
capabilities and improved financial performance. CASC states that it places a great emphasis on
China is now launching more satellites on more R&D. CASC views basic and applied research as
rockets each year, including an increasing number the source of its overall research efforts, system
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